The Gravestone Doji Candlestick is a single candlestick pattern that appears in a chart and reflects a significant amount of uncertainty, typically after an extended advance or decline in the share’s price.
This article is different from the others that you can find about the Gravestone Doji Pattern. In addition to explaining technically how the Gravestone Doji Candlestick works, it also explains why this technical analysis pattern cannot work independently.
This technical analysis indicator may be beneficial in specific situations and when used with other indicators. We should ideally use this indicator together with volume indicators.
The need to consult volume data makes the Gravestone Candlestick challenging to apply, for example, on a trading platform like the MetaTrader4 that doesn’t provide reliable volume information. If you’re using the metatrader4 for forex trading, though, I’ll show you how to get this data.
Because the Gravestone Doji indicates a triumph of sellers over buyers, and because the price fluctuations in phases of low volume may have no significance, the data on volumes is essential.
I will tell you more about the pattern. I’ll also tell you when it’s not good to use the pattern, like in the middle of a trend. There is little worth in a side market with no direction because this pattern has minimal significance.
However, before I get into these explanations, I’ll go through the basics of this indicator according to conventional technical analysis. If you already know this indicator, you may skip the next paragraph.
What is the Gravestone Doji Candlestick Pattern
The Gravestone is easily recognizable by its long, upper shadow that reaches the high of the day. It contains no lower shadow. The candlestick showed tremendous selling pressure throughout the trading session, which forced prices down to close at their lows for the day.
The Gravestone Doji Candlestick pattern is a type of candle. It can confuse people because it looks like another typical candle. The difference is that the Gravestone Doji has a long upper shadow and no lower wick.
In comparison, the other similar candle called the Shooting Star has a long upper shadow but a lower wick. The Shooting Star represents a single period of market weakness. In contrast, the Gravestone Doji Candlestick pattern reflects uncertainty over an extended period.
The Gravestone Doji is a bearish candlestick formation that shows the candle’s low point for the day. When the upper shadow depicts new high ground for the advance, it’s typically seen at the end of an uptrend.
Investors should consider exiting long positions or protecting current profits following this formation because it may signal that momentum is starting to shift against them.
The market closes at or near its opening price, which signifies that the market is feeling exhausted.
A gravestone Doji is produced when the sellers in the market have nearly succeeded in bringing the session’s candlestick down from a session high to the session’s open price.
The long upper shadow indicates that the trend is approaching a critical turning point.
The price may have fallen due to buyers/profit-taking during the trading session, when a large number of sellers/profit-taking may have entered the market and driven down the session’s price to its opening.
This is important because it establishes that sellers are powerful and win the fight.
Automatically Identify The Gravestone Doji On Your Charts For Free
The Gravestone Doji is usually identified by an auto trading indicator, which reports the pattern on the chart to you.
This indicator from Tradingview has a function that is similar to the one I mentioned above. As you can see in the graph below, it indicates when the Gravestone formation is about to occur on the chart.
It is also possible to construct an automatic trading system using the platform, linking this indicator with other technical indicators for backtests, which are crucial before implementing a strategy.
You can also discover the volumes on TradingView, as I stated in the introduction, and will expand upon later.
In any case, if you know how to identify this pattern manually, it’s easy to do so without the aid of automatic systems.
An automated trading system may scan a large watchlist of instruments for this signal, such as all Nasdaq stocks. The trader’s work is considerably simplified.
We can also incorporate filters into the automated system to keep it from flagging the pattern when the market is not ideal.
How to use the Gravestone Doji candlestick indicator?
The suppliers of the shares successfully lowered the price for most of the day until late in the day, when a Gravestone Doji Candlestick appeared.
As a result, neither buyers nor sellers were in command.
Price declines were limited, and prices finally closed near their lows. After a long time with a bull market, this signal is very significant. It means that sellers are retaking control of the market.
The Gravestone Doji should indicate a break in the trend, as well as the beginning of a downtrend. If you use the appropriate filters that I’ll show you later.
On the other hand, the Gravestone Doji reflects a great deal of strength from sellers who may continue in future sessions, as we shall see later.
Volume is the key to Gravestone Doji pattern
In a previous description of the Gravestone Doji, I noted that we must use it with other technical analysis signals. Volumes are very Important since this indicator indicates a battle between Buyers and Sellers.
Because when a Gravestone does not contain essential volumes or has volumes that are lower than the average, the patterns lose their efficacy.
This indicator, based on price trends, requires enough information regarding volume quantities to be effective.
If the Gravestone Doji pattern appears when the volumes are shallow, it will not be considered or has little influence.
When the volumes are more significant than average, this pattern has a strong efficacy since it indicates a battle between buyers and sellers that brought the price to the highs of the day, after which sent it back to the lows.
Because of the high volumes, this price dynamic demonstrates that a genuine battle has occurred and that the sellers have won. Thus, we can state that in future sessions, the sellers’ chances outweigh the buyers’ strength are pretty good.
The need to confirm volumes makes the Gravestone Doji more effective on highly liquid and highly extradited assets such as blue-chips stocks.
If you use the Gravestone pattern on a low-liquid instrument like a small-cap share, then you must be careful. This is because it might not work correctly.
Best trading signals during strong trends using ADX
Another crucial element in determining the validity of a Gravestone Doji is its position within a market cycle. In a range market, this formation will carry very little weight because the market is in equilibrium, and this pattern has no credibility during these times.
When the Gravestone Doji pattern appears during an upswing, we must give it greater attention. The more advanced the uptrend is, the stronger this indication will become.
The more significant the trend, the more reliable this indicator is since it might signal a buyer’s pause and profit-taking.
As a result, it’s critical to start by eliminating range market phases and determining the trend’s strength using a filter.
The ADX is a technical indicator that may be used as a filter for trend power, and it’s almost certainly worth considering. A value greater than 25 in the ADX indicates a highly significant trend. In contrast, even higher values show increasingly specific trends as Trend Stop Alarms.
Don’t use the Gravestone during intraday periods
The Gravestone Doji pattern is more trustworthy in daily and longer timeframes. We should not use this pattern in intraday charts for a variety of reasons.
There is a lot of background noise during the intraday periods, and prices are frequently jumping around. Furthermore, there are many instances of low liquidity during the intraday sessions, which make the Gravestone Doji pattern ineffective.
The daily timeline is accurate enough to evaluate the Gravestone. At the same time, a weekly time frame will be even more trustworthy because the conflict between sellers and buyers has been going on for a whole week.
Gravestone Doji & RSI: A Powerful Combination
The Relative Strength Index RSI, as previously said, is a helpful tool for linking the Gravestone Doji formation. The RSI, as you are undoubtedly aware, is the most commonly utilized indicator for identifying overbought and oversold situations.
When the 21-period RSI breaks out of 70, we are in an overbought condition.
During an upswing and overbought stage, the Gravestone Doji pattern appears as a strong selling signal.
In these stages, anomalies in the current trend can occur, so the pattern will notify us via price movement to react appropriately.
How to build a strategy based on this pattern
Suppose I want to make an automated strategy based on this pattern. In that case, I need to use all of the indicators and create a system that we can also follow in a discretionary way.
How to create a strategy with Gravestone
To check in real-time how high the volumes are compared to the previous trading days, I would first build a 5-period moving average on the volume indicator.
It’s essential to remember that the Gravestone Doji should only be used on daily or higher timeframes.
As a first filter, the volumes must be greater than or equal to your 5-period average, which may range up to 20 periods. It all depends on the instrument we want to trade.
This filter will have less weight than the previous ones. Still, it will have to be taken into consideration by the Gravestone Doji system.
A final element that we may include in the RSI indicator will indicate whether we are in an overbought condition and further confidence in the system.
Using all of the filters will undoubtedly reduce the number of signals detected. Still, they will be far more dependable as a result.
You can use a stock screener to get a list of all the stocks that fit your criteria. It will make things easier by not going through all of them and looking for which ones you want.
Real market examples
Below, in the Barnes Group inc. Daily chart, you can observe a pattern-taking action during a side market event. In this case, the MACD is positive while the ADX is below 20, suggesting no trend.
Not only is the trend unreliable in these times, but the volumes are also far below their 5-day moving average.
Although the Gravestone Doji, like any other technical analysis pattern, can only be meaningful if considered in the context of the entire market.
Using this pattern alone to open and close trades makes no sense. The use of filters can make price action an effective tool for analyzing the market and signaling trading opportunities.
I’m not sure if the Gravestone Doji trading system can be profitable, and it’s critical to code. Run backtests on whatever tools you’ll need before employing it.
However, if all these things happen, this might tell us when to make a good entry.